# Expert Answers

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.50%. Using the SML, what is the firm's required rate of return?

10.85%

15.53%

13.39%

10.31%

14.86%

Question 5

Jim Angel holds a $200,000 portfolio consisting of the following stocks: What is the portfolio's beta?

Stock

Investment

Beta

A

$50,000

0.75

B

$50,000

0.80

C

$50,000

1.00

D

$50,000

1.20

Total

$200,000

0.956

1.022

0.853

1.144

0.938

Question 6

Mikkelson Corporation's stock had a required return of 15.00% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)

23.37%

21.28%

19.00%

20.14%

16.15%

Question 7

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Long-term debt (bonds, at par)

$10,000,000

Preferred stock

2,000,000

Common stock ($10 par)

10,000,000

Retained earnings

4,000,000

Total debt and equity

$26,000,000

$5,276,731

$5,412,032

$5,547,332

$7,706,000

$7,898,650

The Francis Company is expected to pay a dividend of D = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

$22.83

$27.99

$27.17

$22.01

$24.18

Question 9

Kollo Enterprises has a beta of 0.82, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return?

6.73%

6.64%

9.30%

9.56%

8.85%

Question 10

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 7.50%, based on semiannual compounding. What is the bond's price?

$977.71

$860.39

$899.50

$1,202.59

$821.28

Question 11

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

10.36%

10.62%

10.88%

11.15%

11.43%

Question 12

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?

7.86%

8.14%

7.72%

7.37%

6.96%

Question 13

Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?

0.49%

0.55%

0.61%

0.68%

0.75%

10.85%

15.53%

13.39%

10.31%

14.86%

Question 5

Jim Angel holds a $200,000 portfolio consisting of the following stocks: What is the portfolio's beta?

Stock

Investment

Beta

A

$50,000

0.75

B

$50,000

0.80

C

$50,000

1.00

D

$50,000

1.20

Total

$200,000

0.956

1.022

0.853

1.144

0.938

Question 6

Mikkelson Corporation's stock had a required return of 15.00% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)

23.37%

21.28%

19.00%

20.14%

16.15%

Question 7

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Long-term debt (bonds, at par)

$10,000,000

Preferred stock

2,000,000

Common stock ($10 par)

10,000,000

Retained earnings

4,000,000

Total debt and equity

$26,000,000

$5,276,731

$5,412,032

$5,547,332

$7,706,000

$7,898,650

The Francis Company is expected to pay a dividend of D = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

$22.83

$27.99

$27.17

$22.01

$24.18

Question 9

Kollo Enterprises has a beta of 0.82, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return?

6.73%

6.64%

9.30%

9.56%

8.85%

Question 10

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 7.50%, based on semiannual compounding. What is the bond's price?

$977.71

$860.39

$899.50

$1,202.59

$821.28

Question 11

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

10.36%

10.62%

10.88%

11.15%

11.43%

Question 12

Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?

7.86%

8.14%

7.72%

7.37%

6.96%

Question 13

Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?

0.49%

0.55%

0.61%

0.68%

0.75%

You'll get a 18.4KB .DOCX file.